Sharp Considers Another Capital Raising

Japanese display maker Sharp is considering yet another capital raising, its second in less than a year, as it looks to shore up its balance sheet.

According to a report in the Asahi Shimbun, Sharp is mulling issuing new shares worth up to Y200 billion ($2 billion). The company said in a statement over the weekend it is considering various steps to boost its capital, but declined to comment beyond the statement.

But the news sent shares of Sharp down as much as 10% in Monday trade to Y269, its lowest intraday level in five months, and shaved off nearly $500 million off its market value.

Sharp’s shares faced a heavy sell-off as investors worried that another equity offering would further dilute the value of their holdings.

Such a move is particularly upsetting for Sharp shareholders since the company already launched an $1.4 billion equity offering just less than a year ago. From October to November, the company raised about Y140 billion through a new share issuance coupled with funds from its business partners including auto-parts maker Denso. At the time, the company said the funds are earmarked for investments for liquid-crystal displays used in smartphone and tablets computers and new facilities in Asia for its home-appliance operations.

While the company badly needs fresh capital to boost its balance sheet and to invest in new technologies, Hiroshi Sakai, an analyst at SMBC Friend Research Center, said the financing will need to include more funding from business partners and other less-dilutive measures to be acceptable for existing investors. Another offering of a $2 billion scale in new shares would comprise more than 40% of its market value.

Following two straight years of losses totaling more than $9 billion, Sharp projects to return to a small profit for the year ended in March . Still, its equity ratio, a measure of financial stability, stood at 13% as of the end of December, compared with 42% for its key rival Japan Display.

Sharp is expanding its production lineup at its Kameyama plant in central Japan, originally designed to make large TV displays, to churn out displays for smartphones and tablets. The Japanese maker hopes to raise the plant’s utilization rate and to lower manufacturing costs per display by churning out hundreds of smartphone displays from a single glass sheet.

While earnings are improving, analysts such as Sakai say the company has no time to lose to increase investments for smartphone and tablet displays. Otherwise, he cautions the company will face the same dismal path Japanese makers faced with big displays: succumbing to price erosion and rise of Korean and Chinese rivals.

“Increasing competition in small and medium-sized displays is inevitable. The key is whether Sharp can make investments to maintain its competitive edge,” Sakai said. In this market, Sharp faces competition from rivals including Japan Display, LG Display, and Taiwan’s AU Optronics.

If the company does go ahead and carries out another big equity offering, the key is how much of that new money will be allocated to investing in growth areas such as its power-saving display technology, he added.

Sharp’s interest-bearing debt at the end of December 2013 was 1.22 trillion yen, up 24.5 billion yen compared to the end of September 2013.

About Japan Real Time

Japan Real Time is a newsy, concise guide to what works, what doesn’t and why in the one-time poster child for Asian development, as it struggles to keep pace with faster-growing neighbors while competing with Europe for Michelin-rated restaurants. Drawing on the expertise of The Wall Street Journal and Dow Jones Newswires, the site provides an inside track on business, politics and lifestyle in Japan as it comes to terms with being overtaken by China as the world’s second-biggest economy. You can contact the editors at japanrealtime@wsj.com